Friday, August 10, 2012

The risk-reward ratio of owning Malaysian equities ahead of the coming election remains unfavorable despite Bursa Malaysia underperforming against Asean peers. Even if BN were to win with an increased majority, which could result in short term rally, the government would likely need to start tightening its belt on spending to prevent the fiscal deficit from escalating further and attracting the possibility of a country rating downgrade.

This time, expects the market to react sooner (Sharp correction), given
the experience of the last election and availability of opinion polls that were
unavailable previously.

The most likely outcome of the election would be a BN win but with a
reduced majority. In this scenario, expects some short term negative impact and
continued political overhang as the market digests the implications, including
the upcoming UMNO election where PM Datuk Seri Najib could be a challenged. A
key drive for this scenario was the 25% increase in new voters, rising to 13.4
million from 10.7 million in 2008.

Political aside, valuations in
Malaysia are not cheap (Aug 2012).

Malaysian equities are trading at one standard deviation above
historical average PER and price to book values. Construction, infra and power
could be impacted by uncertainties as the market starts pricing in the
political risks ahead of the election.